Exhibit 13**Financial Highlights**                         **May 31,** **(in thousands, except per share information)**  **2006**  **2005**  **2004**  **2003**  **2002**     **Revenues**  **$****114,806**  **$****107,616**  **$****94,110**  **$****108,796**  **$****147,864**     **Costs of revenues and depreciation**   **49,350**   **45,862**   **44,778**   **62,663**   **81,678** **Selling, general and administrative expenses**   **33,755**   **29,869**   **32,207**   **37,399**   **50,492** **Loss on impairment of goodwill and intangibles**   **—**   **—**   **—**   **37,135**   **—** **Interest and other, net**   **(2,705****)**  **(3,234****)**  **(1,335****)**  **(4,091****)**  **(2,232****)**    **Income (loss) before income taxes**   **34,406**   **35,119**   **18,460**   **(24,310****)**  **17,926** **Income tax provision (benefit)**   **12,222**   **10,854**   **6,476**   **(9,324****)**  **4,804**     **Net income (loss)**  **$****22,184**  **$****24,265**  **$****11,984**  **$****(14,986****)** **$****13,122**     **Earnings (loss) per share:**                     **Basic**  **$****0.87**  **$****0.97**  **$****0.48**  **$****(0.60****)** **$****0.53** **Diluted**  **$****0.86**  **$****0.96**  **$****0.48**  **$****(0.60****)** **$****0.53** **Shares used in per share calculation:**                     **Basic**   **25,359**   **24,978**   **24,860**   **24,810**   **24,602** **Diluted**   **25,762**   **25,369**   **25,034**   **24,810**   **24,837** **Total assets**  **$****259,682**  **$****233,222**  **$****206,367**  **$****277,100**  **$****307,141** **Shareholders’ equity**  **$****221,841**  **$****195,017**  **$****168,616**  **$****254,014**  **$****266,223** **Shareholders’ equity per common share**  **$****8.68**  **$****7.77**  **$****6.77**  **$****10.23**  **$****10.75** 

 
**ELECTRORENT 2006 ANNUAL REPORT**Management’s**Discussion and Analysis**The following discussion of our financial condition and results of operations should be readin conjunction with the fiscal 2006 Consolidated Financial Statements and the notes thereto and theother financial and statistical information appearing elsewhere in this annual report.OverviewWe generate revenues through the rental, lease and sale of electronic equipment, primarily test andmeasurement (T&M) and personal computer-related (DP) equipment. In fiscal 2006, 79% of rental andlease revenues was derived from T&M equipment. This percentage has been increasing over the lastthree fiscal years due to the steady erosion of DP rental and lease revenues related to declines inproduct purchase prices and unit volume and increasing T&M activity in telecommunications,aerospace and defense markets. However, DP revenues began to stabilize in fiscal 2006. In addition,on January 31, 2006, we acquired Rush Computer Rentals, Inc. (“Rush”), and its on-going revenueshave added to our base of DP revenues.In fiscal 2006, rental revenues comprised 79% of our rental and lease revenue. That percentage hasalso been increasing over the last three years due to a significant decline in personal computerleasing activity, and an increase in rental activity that began in fiscal 2005.A significant part of our T&M equipment portfolio is rented or leased to large companies in theaerospace, defense, electronics and telecommunications industries. We believe that a large part ofour T&M equipment is used in research and development activities. We also rent equipment tocompanies of various sizes representing a cross-section of industry. Our business is relativelynon-seasonal except for the third quarter months of December, January and February, when rentalactivity declines due to extended holiday closings by a number of customers. In addition, becauseFebruary is a short month, rental billing is reduced.The profitability of our business depends in part on controlling the timing, pricing and mix ofpurchases and sales of equipment. We seek to acquire new and used equipment at attractive pricesfor the purpose of deriving a profit from a combination of renting and/or selling such equipment.The sale of equipment, either after acquisition or after it has been rented, can comprise asignificant portion of our revenues and operating profit. To maximize our overall profit from therental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis byanalyzing our product strategy for each specific equipment class in light of that equipment’shistorical and projected life cycle. In doing so, we must compare our estimate of potential profitfrom rental with the potential profit from the product’s immediate sale and replacement with new orother equipment. In our analysis, we assume depreciation and impairment of equipment based onprojected performance and historical levels, although historical trends are not necessarilyindicative of future trends. Our overall equipment management is complex and our product strategycan change during a product’s lifetime based upon numerous factors, including the U.S. and globaleconomy, interest rates and new product launches. Our strategic equipment decisions are generallybased on the following fundamentals:**•** Our acquisition cost; **•** Our estimates of current and future market demand for rentals; **•** Our estimates of current and future supply of product; **•** The book value of the product after depreciation and other impairment; **•** Our estimates of the effect of interest rates on rental and leasing fees as well as capital financing; and **•** Our estimates of the potential current and future sale prices.If we do not accurately predict market trends, or if demand for the equipment we supply declines,we can be left with inventory that we are unable to rent or sell for a profit. We assess thecarrying value of the equipment pool on a quarterly basis or when factors indicating impairment arepresent. In the fourth quarter of fiscal 2005, we recorded non-cash impairment charges of $0.6million resulting from low projected demand for certain rental products, including general purposeand communications equipment.When the U.S. and global economy began to rebound in fiscal 2004, we saw increased demand for ourequipment, and were able to sell equipment that was older and more fully depreciated. Due in partto these events, we experienced greater
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**ELECTRORENT 2006 ANNUAL REPORT**than normal gross margin on equipment sales of 53% in fiscal 2005. As previously discussed, we havemaintained our equipment management strategy, and, accordingly, we believe that gross margin onsales will return to normal historical levels of 40% to 45% as older and previously impairedequipment constitute a smaller percentage of sales. Gross margin on sales was 46% in fiscal 2006.Results for future quarters, however, are subject to unanticipated events, as in the case ofunusual opportunities for sales and early termination of equipment leases. Such early terminationscan (i) result in sales proceeds to the extent that the customer decides to purchase the equipmentinvolved, (ii) accelerate lease payments to the extent of lease termination fees, and/or (iii) tothe extent the customer does not purchase the equipment, increase the pool of equipment availablefor lease by us, which would adversely affect future utilization unless we can rent, lease or sellthat equipment to another party.We generally measure our overall level of profitability with the following metrics:**•** Net income per diluted common share (EPS); **•** Net income as a percentage of average assets; and **•** Net income as a percentage of average equity.Strategic Growth PlansIn recent periods, we have seen some recovery of our business from its significant contractionduring the early part of this decade. Although we reduced our expenses to maintain profitabilityduring the contraction, we believe that our resources and financial infrastructure remain capableof handling a significantly greater volume of business activity without a proportionate increase inexpenses. Based on this belief and our assessment of the improving climate in recent periods, wehave been seeking ways to increase revenues to leverage that infrastructure. These strategiesinclude:Internal Growth Strategies: We intend to continue internal growth by building upon our vendor andcustomer relationships and expanding the types of services and equipment we provide. Thus, forexample,**•** We have been purchasing significantly more environmental test equipment to expand our presence in this market. **•** We were recently able to persuade a key vendor to increase its sales force compensation for test equipment lease transactions referred to us. **•** We recently began marketing a flexible leasing program that allows customers to build equity thatcan be applied against the future purchase of the test equipment. **•** We have implemented an expanded customer communication program to identify used equipmentre-marketing opportunities. **•** We have re-focused our DP marketing approach to emphasize short-term, event-oriented rentals inaddition to our traditional markets.Geographic Expansion Strategies: Until recently, our activity was largely limited to North America,except for some limited rentals to North American companies operating in other geographical areas.We intend to exploit opportunities for expanding our rental and leasing services globally. As partof that strategy, we have recently entered two of the largest 11 world markets: Europeand China. The results for our new China subsidiary exceeded our financial objectives in fiscal2006.**•** Our wholly owned subsidiary in Tianjin, China, commenced operations in June 2005 after wereceived what we believe to be one of the first licenses for a wholly foreign-owned equipmentrental business in China. **•** On October 3, 2005, we announced that we acquired a T&M equipment rental company based inBelgium, from which we are beginning to service the European market. Europe represents awell-established market with a number of meaningful competitors. So we expect that building aprofitable business in Europe will be more difficult and take longer, but our orders increased infiscal 2006 and we believe in our future in Europe.Acquisition Growth Strategies: We are also seeking to grow through acquisitions. Acquisitions canpermit us to rapidly add revenues, as well as to expand into new geographical areas and/or markets.In addition to the acquisition of the Belgium company mentioned above, on January 31, 2006, weannounced that we had completed the acquisition of Rush Computer Rentals, Inc., a private companyheadquartered in Wallingford, Connecticut, with annual revenue of approximately $10 million fromthe rental and sale of a wide range of personal computers and related equipment to customerslocated primarily in the Northeast United States.
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**ELECTRORENT 2006 ANNUAL REPORT**Of course, none of these growth strategies may be successful, and each entails risks that couldimpact our continuing business results. In addition to the risks associated with our coreoperations, there are special risks associated with international operations and with acquisitions,as well as with growth in general. For a more detailed summary of some of the risks associated withthese and other factors, please see the Risk Factors set forth in our 2006 Annual Report on Form10-K.Profitability and Key Business TrendsIn fiscal 2006, revenues increased by 6.7% to $114.8 million from the prior year period, operatingprofit decreased by 0.6% to $31.7 million, and net income decreased by 8.6% to $22.2 million. Theprior year period benefited from several large non-recurring items, including fees of $1.7 millionrelated to an early lease termination, gross profit on two buyouts totaling $1.0 million, alitigation settlement of $1.8 million, and a tax accrual reduction of $2.5 million. Excluding thesetransactions from the prior year, revenue growth is consistent with the economic environment forfiscal 2006. The relatively flat operating profit for fiscal 2006 compared to fiscal 2005 alsoreflects costs of developing our operations in China and higher depreciation expense related to alarger and newer equipment pool.Our profitability measurements are presented in the table below for the years ended May 31:               2006  2005  2004  Net income per diluted common share (EPS) $0.86  $0.96  $0.48 Net income as a percentage of average assets  9.0%  10.4%  4.9%Net income as a percentage of average equity  10.7%  12.7%  5.6% T&M rental and lease activity increased in fiscal 2005 and fiscal 2006, reflecting thestrengthening global economy and telecommunications segment. DP rental and lease activity alsoincreased for the same period, reflecting increasing demand and the acquisition of Rush ComputerRentals on January 31, 2006.The amount of equipment on rent based on acquisition cost increased from $107.0 million at May 31,2005, to $119.5 million at May 31, 2006. Acquisition cost of equipment on lease increased from$36.6 million at May 31, 2005 to $41.7 million at May 31, 2006. Utilization for our T&M equipmentpool, based on acquisition cost, increased from 59.3% at May 31, 2005, to 65.8% at May 31, 2006.Over the same period, utilization of our DP equipment pool increased from 58.3% to 59.9% . Theoverall utilization rate for our equipment pool increased from 59.2% at May 31, 2005, to 64.9% atMay 31, 2006. These increases in utilization generally reflect strengthening demand for rental andlease equipment.During the same fiscal year periods, monthly rental rates as a percent of acquisition cost for T&Mwere comparable and DP rental rates increased 5.9%, reflecting the lower acquisition cost of theRush equipment pool, while monthly T&M lease rates as a percent of acquisition cost declined 3.5%and DP lease rates increased by 7.2% . In the fourth quarter of fiscal 2005, we recorded a non-cashimpairment charge of $0.6 million resulting from low projected demand for certain rental products,including general purpose and communications equipment.We believe that demand for rental electronic equipment should improve provided the U.S. economycontinues to grow. Also, any increased defense spending on advanced weapons and intelligence systemsshould benefit our business. While those developments continue to unfold, however, we will striveto operate the business efficiently at the prevailing activity levels.Critical Accounting Policies and EstimatesThe preparation of consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“generally accepted accounting principles”)requires management to make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period.On a regular basis, management reviews these estimates including those related to asset lives anddepreciation methods, impairment of long-lived assets including rental and lease equipment,allowance for doubtful accounts and equipment losses, and income taxes. These estimates are basedon management’s historical experience and on various other assumptions believed to be reasonableunder the circumstances. Actual results may differ from these estimates under different
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**ELECTRORENT 2006 ANNUAL REPORT**assumptions or conditions. Management believes, however, that the estimates, including those forthe above-listed items, are reasonable.Management believes the following critical accounting policies affect the more significantjudgments and estimates used in the preparation of our financial statements:Asset Lives and Depreciation Methods: Our primary business involves the purchase and subsequentrental and lease of long-lived electronic equipment. Management has chosen asset lives that itbelieves correspond to the economic lives of the related assets. Management has chosen depreciationmethods that it believes match our benefit from the assets with the associated costs. Thesejudgments have been made based on management’s expertise in each equipment type that we carry. Ifthe asset life and depreciation method chosen do not reduce the book value of the asset to at leastour potential future cash flows from the asset, we would be required to record an impairment loss.Depreciation methods and useful lives are periodically reviewed and revised as deemed appropriate.Impairment of Long-Lived Assets: On a quarterly basis, management reviews the carrying value of ourrental and lease equipment to determine if the carrying value of the assets may not be recoverabledue to current and forecasted economic conditions. This requires management to make estimatesrelated to future cash flows from the assets and to determine whether any deterioration istemporary or permanent. If theseestimates or the related assumptions change in the future, management may be required to recordadditional impairment charges. In the fourth quarter of fiscal 2005, we recorded a non-cashimpairment charge of $0.6 million resulting from low projected demand for certain rental products,including general purpose and communications equipment. No similar impairment change was recordedin fiscal 2006.Allowances for Doubtful Accounts and Equipment Losses: We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of customers to pay our invoices. We alsomaintain an allowance for estimated losses resulting from the inability of customers to pay forlost equipment. These estimates are primarily based on the amount of time that has lapsed since therelated payments were due as well as specific knowledge related to the ability of customers to makethe required payments. If the financial condition of our customers were to deteriorate, additionalallowances could be required that would reduce income. Conversely, if the financial condition ofthe customers were to improve or if legal remedies to collect past due amounts were more successfulthan expected, the allowances for doubtful accounts and equipment losses may need to be reduced andincome would be increased.Income Taxes: As part of the process of preparing our consolidated financial statements,management is required to estimate income taxes in each of the jurisdictions in which we operate.Significant management judgment is required in determining the provision for income taxes anddeferred tax assets and liabilities. This process involves management estimating actual current taxexposure together with assessing temporary differences resulting from differing treatment of items,such as depreciation and amortization, for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included within our consolidated balance sheet. Wethen assess the likelihood that our deferred tax assets will be recovered. To the extent managementbelieves that recovery is not likely, we establish a valuation allowance.Fiscal 2006 Compared with Fiscal 2005Total Revenues: Total revenues for fiscal 2006 increased $7.2 million, or 6.7%, to $114.8million compared to $107.6 million in the prior year. The increase in total revenues was due to a12.8% increase in rental and lease revenue, net of an 11.3% decrease in sales of equipment andother revenues.Rental and lease revenues in fiscal 2006 were $90.5 million, a 12.8% increase from the prior year.This increase reflects higher demand and rental rates for T&M and DP equipment in our major marketsegments, which we believe stems from the general economic expansion, as well as our internationalexpansion into China and Europe, and the Rush acquisition during fiscal 2006.Sales of equipment and other revenues decreased 11.3% to $24.3 million in fiscal 2006, from $27.4million in fiscal 2005. The prior year period benefited from several large non-recurring items,including an early lease termination and two buyouts, totaling $3.7 million.We sell used equipment as a normal part of our rental business. However, these sales can fluctuatefrom quarter to quarter and year to year depending on equipment availability and customerrequirements and funding. Gross margin on
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**ELECTRORENT 2006 ANNUAL REPORT**sales decreased to $9.5 million in fiscal 2006 from $11.0 million a year ago, while the grossmargin percentage decreased to 46% from 53% over the same periods. In large measure, the decline insales reflects the improved conditions for our rental business, which makes us less inclined tosell equipment from our pool. The declines in gross margin and gross margin percentage reflect twolarge non-recurring buyout transactions with high gross margins in last year’s third quarter. Thedecline in gross margin percentage in the current year also reflects a return to historic levels,as older and previously impaired equipment constitute a smaller percentage of equipment sold thanduring the last two years.Depreciation of Rental and Lease Equipment: Depreciation of rental and lease equipment increased to$35.8 million, or 39.5% of rental and lease revenues in fiscal 2006, from $33.4 million, or 41.6%of rental and lease revenues, in fiscal 2005. The increased depreciation expense reflects higherexpenditures for new rental and lease equipment during fiscal 2005 and fiscal 2006, while the lowerratio reflects higher equipment utilization and increased revenues in fiscal 2006.Costs of Revenues Other Than Depreciation: Costs of revenues other than depreciation increased 8.8%to $13.6 million in fiscal 2006, from $12.5 million in fiscal 2005. Costs of revenues other thandepreciation primarily includes the cost of equipment sales, which increased to 53.6% of equipmentsales in fiscal 2006, from 47.4% of equipment sales in fiscal 2005. The increase in this percentagereflects the customer buyout transactions described above and also reflects the expected return tohistorical levels from lower cost ratios in the previous year, as older and previously impairedequipment constitute a smaller percentage of equipment sold.Selling, General and Administrative Expenses: Selling, general and administrative expensesincreased 13.0% to $33.8 million in fiscal 2006 as compared to $29.9 million in fiscal 2005. Thisincrease primarily reflects additional operating costs related to the Rush acquisition, an overallincrease in business activity and certain expenses associated with the development of our newoperations in China and Europe. SG&A expenses as a percentage of total revenues increased to 29.4%in fiscal 2006 from 27.8% in fiscal 2005.Operating Profit: As a result of the changes in revenues and operating expenses discussed above,operating profit was $31.7 million or 28% of total revenues in fiscal 2006 compared to an operatingprofit of $31.9 million or 30% of total revenues in fiscal 2005.Interest and Investment Income, Net: Net interest and investment income of $2.7 million for fiscal2006 was about twice the $1.5 million recorded in fiscal 2005. This primarily reflects increases inprevailing money-market interest rates and to a lesser degree increased cash balances.Income Tax Provision: Our effective tax rate was 36% in fiscal 2006, compared to 31% in fiscal2005. Fiscal years 2006 and 2005 include reductions in the accrued liability for income taxes of$1.0 million and $2.5 million, respectively, reflecting the expiration of specific risks related toclosed tax audit years.Fiscal 2005 Compared with Fiscal 2004Total Revenues: Total revenues for fiscal 2005 increased $13.5 million, or 14%, to $107.6 millioncompared to $94.1 million in the prior year. The increase in total revenues was due to an increasein rental and lease revenue of 14% and an increase in sales of equipment and other revenues of 15%.Rental and lease revenues in fiscal 2005 were $80.3 million, a $10.0 million increase from theprior year. This increase reflects higher demand for T&M equipment in our major market segments,which we believe stems from the general economic recovery and our additional lease programofferings. However, an early termination of DP leases with one customer, as described below,resulted in a decrease in quarterly lease revenues of approximately $0.9 million, beginning inJanuary 2005.Sales of equipment and other revenues were $27.4 million in fiscal 2005, an increase of $3.5million as compared to fiscal 2004. This increase is due to an early lease termination and relatedbuyout transaction with one customer as of December 31, 2004, which resulted in proceeds ofapproximately $3.4 million. That amount included the fair market value of the equipment and leasetermination charges. Gross margin on sales excluding the lease termination charges increased from$9.4 million, or 44.4%, in fiscal 2004 to $11.0 million, or 52.6%, in fiscal 2005, due toimprovement in equipment market values and increases in sales of equipment that had been previouslywritten down or that was older and more fully depreciated.
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**ELECTRORENT 2006 ANNUAL REPORT**Depreciation of Rental and Lease Equipment: Depreciation of equipment increased from $30.6 millionin fiscal 2004, to $33.4 million, in fiscal 2005. While this expense increased by $2.8 million, or9%, in fiscal 2005, depreciation as a percent of rental and lease revenues decreased from 43% infiscal 2004 to 42% in fiscal 2005. The increased depreciation expense reflects higher expendituresfor new rental and lease equipment that began in fiscal 2004, and impairment charges of $0.6million. The decreased ratio reflects revenues increasing in the current year at a rate higher thandepreciation expense. The acquisition cost of rental and lease equipment was $256.0 million and$239.7 million at May 31, 2005 and 2004, respectively.Costs of Revenues Other Than Depreciation: Costs of revenues other than depreciation decreased from$14.2 million in fiscal 2004 to $12.5 million in fiscal 2005. Costs of revenues other thandepreciation primarily includes the cost of equipment sales, which decreased from 56% of equipmentsales in fiscal 2004 to 47% of equipment sales in fiscal 2005. The decrease in this percentage isgenerally due to a greater portion of equipment that was sold in fiscal 2005 which was more fullydepreciated, had been previously written down, or resulted from sales of leased equipment toleasing customers. Such sales typically result in higher margins.Selling, General and Administrative Expenses: Selling, general and administrative expensesdecreased $2.3 million, or 7% to $29.9 million, in fiscal 2005 as compared to $32.2 million infiscal 2004. Fiscal 2004 includes a $2.3 million accrual related to the retirement of our formercorporate president. Excluding the one-time charge, SG&A expenses were unchanged in fiscal 2005compared to the prior year. Excluding the one-time charge, these expenses as a percentage of totalrevenues decreased from 32% in fiscal 2004 to 28% in fiscal 2005.Operating Profit: As a result of the changes in revenues and operating expenses discussed above,operating profit was $31.9 million or 30% of total revenues in fiscal 2005 compared to an operatingprofit of $17.1 million or 18% of total revenues in fiscal 2004.Interest and Investment Income, Net: Net interest income of $1.5 million for fiscal 2005 increasedfrom the $1.3 million recorded in the prior year, reflecting higher yields on money marketinvestments.Income Tax Provision: The effective tax rate in fiscal 2005 was 30.9% as compared to 35.0% in theprior year. The decline in effective rate was due primarily to the release of tax reserves as aresult of completed tax audits and changes in estimate in addition to the increase in tax exemptincome and extra-territorial income exclusions. The reevaluation of accrued liabilities related topositions taken on federal and state returns reduced tax expense by $2.5 million as compared to$0.7 million in the prior year. Increases in the amounts and yields of tax exempt investmentscombined with the benefits realized by extra-territorial income exclusions reduced expense by $0.5million as compared to $0.1 million in the prior year.Liquidity and Capital ResourcesDuring the last three fiscal years, our primary capital requirements have been purchases of rentaland lease equipment. We generally purchase equipment throughout each year to replace equipment thathas been sold, and to maintain adequate levels of rental equipment to meet existing and newcustomer demands. To support areas of potential growth for both T&M and DP equipment, and to keepour equipment pool technologically up-to-date, we paid for$61.4 million of rental and lease equipment in fiscal 2006. This amount was 14.9% lowerthan the $72.1 million in the prior year, primarily reflecting increased utilization of theequipment pool. This figure does not include the $9.4 million we paid in the 2006 fiscal year forthe acquisition of Rush (and its equipment pool), as described in Note 2 to the CondensedConsolidated Financial Statements.On January 14, 2004, we paid a special distribution of $4.00 per outstanding common share, whichtotaled $99.5 million. Subsequent to this distribution and through May 31, 2006, cash, cashequivalents and marketable securities remained relatively stable, in total. We expect that thelevel of these liquid assets will begin to increase, unless equipment purchases increase inresponse to demand, or we decide to buy back additional shares of our common stock, pay anotherspecial distribution, pay dividends, finance another acquisition, or pursue other opportunities. Wehave invested our cash balance in money market funds and other instruments with maturities of lessthan 90 days.Our rental and lease equipment portfolio totaled $262.3 million, at acquisition cost, at May 31,2006, increasing $6.4 million from a year ago. During the three years ended May 31, 2006, we madepayments for equipment purchases totaling $176.3 million, and recorded a net increase in ourequipment portfolio at acquisition cost of $9.6 million, net of the liquidation of
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**ELECTRORENT 2006 ANNUAL REPORT**used equipment. We have three principal sources of liquidity: cash flows provided by our operatingactivities, proceeds from the sale of equipment from our portfolio, and external funds thathistorically have been provided by bank borrowings.During fiscal 2006 and fiscal 2005 net cash provided by operating activities was $47.7 million and$48.7 million, respectively. This decrease is generally the result of a decline in net income infiscal 2006 and an increase in deferred tax liabilities in the prior fiscal year related to bonusdepreciation.During fiscal 2006 net cash used in investing activities was $24.7 million, compared to $48.0million in fiscal 2005. This decrease is attributable to a net redemption of marketable securitiesand lower payments for the purchase of rental and lease equipment in fiscal 2006, partially offsetby cash paid for the acquisition of Rush.Net cash provided by financing activities was $3.7 million in fiscal 2006 compared to $1.7 millionin the prior fiscal year, due to a greater amount of stock options that were exercised in thecurrent year.As the following table illustrates, cash flows from operating activities and proceeds from the saleof equipment have been more than sufficient to fund our operations during the last three years.                   Three Years Ended          (in thousands) May 31, 2006  2006  2005  2004  Cash flows from operating activities* $138,416  $47,743  $48,652  $42,021 Proceeds from sale of equipment  62,549   20,512   20,944   21,093  Total  200,965   68,255   69,596   63,114 Payments for equipment purchases  (176,296)  (61,352)  (72,129)  (42,815)Net increase (decrease) in equipment portfolioat acquisition cost  9,643   6,353   16,219   (12,929) * For the components of cash flows from operating activities, see the Consolidated Statements of Cash Flows.As indicated by the table, cash flows from operating activities and proceeds from sale ofequipment provided 114% of the funds required for equipment purchased during the three-year periodended May 31, 2006. Rental and lease revenues have been significantly supplemented as a source ofcash flow by proceeds from the sale of equipment from our portfolio. Management believes that cashand cash equivalents, marketable securities, cash flows from operating activities, proceeds fromthe sale of equipment and our borrowing capacity will be sufficient to fund our operations for atleast the next twelve months.We have a $10.0 million revolving line of credit with an institutional lender, subject to certainrestrictions, to meet equipment acquisition needs as well as working capital and general corporaterequirements. We had no borrowings outstanding at May 31, 2006.We lease certain facilities under various operating leases. Most of the lease agreements provide uswith the option of renewing the lease at the end of the initial lease term, at the fair rentalvalue, for periods of up to five years. In most cases, management expects that in the normal courseof business facility leases will be renewed or replaced by other leases.Inflation generally has favorably influenced our results of operations by enhancing the saleprices of our used equipment. However, lower inflation rates and the continued availability ofnewer, less expensive equipment with similar or better specifications could result, over a periodof several years, in lower relative sale prices for used electronic equipment. If this shouldoccur, our margins and earnings will be reduced. Prices of new and used electronic test equipmenthave not consistently followed the overall inflation rate. Prices of new and used personalcomputers and servers have consistently declined for the past three years. Because management isunable to predict the advances in technology and the rate of inflation for the next several years,it is not possible to estimate the impact of these factors on our margins and earnings.
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**ELECTRORENT 2006 ANNUAL REPORT**Contractual ObligationsThe table below presents the amount of payments due under our contractual obligations. The tablereflects expected payments due as of May 31, 2006 and does not reflect changes that could ariseafter that time.                       Payments due by period       Less than          More than Contractual Obligations (in thousands) Total  1 year  1-3 years  3-5 years  5 years  Facility lease payments, notincluding                    property taxes and insurance $2,559  $733  $1,598  $228   — Employment agreements  81   81   —   —   —  Total $2,640  $814  $1,598  $228   —  Qualitative and Quantitative Disclosures About Interest Rates and Currency RatesWe are exposed to market risks related to changes in interest rates and foreign currency exchangerates, however, we believe those risks to be not material in relation to our operations. We do nothave any derivative financial instruments.As of May 31, 2006 and 2005, our cash and cash equivalents included money market securities and wehad investments in marketable securities. Due to the short-term duration of our investmentportfolio, an immediate 10% change in interest rates would not have a material effect on the fairmarket value of our portfolio, therefore, we would not expect our operating results or cash flowsto be affected to any significant degree by the effect of a sudden change in market interest rateson our securities portfolio.We are also subject to risks associated with foreign currency rate fluctuations to the extent offinancing arrangements for rented and leased equipment denominated in Canadian dollars, euros andChinese yuan. We have determined that hedging of these assets is not cost effective and instead weattempt to minimize our risks due to currency and exchange rate fluctuations through workingcapital management. We do not believe that any foreseeable change in currency rates wouldmaterially or adversely affect our financial position or results of operations.Special Note About Forward-Looking StatementsExcept for the historical statements and discussions contained in this Annual Report, statementscontained in this Annual Report constitute forward-looking statements within the meaning of section21E of the Securities Exchange Act of 1934. These forward-looking statements reflect the currentviews of our management with respect to future events and financial performance; however, youshould not put undue reliance on these statements. We undertake no obligation to update or reviseany forward-looking statements that are or may be affected by developments, which our managementdoes not deem material. When used or incorporated by reference in this Annual Report, the words“anticipate,” “believes,” “expects,” “intends,” “future,” and other similar expressions identifyforward-looking statements. These forward-looking statements are subject to certain risks anduncertainties, not all of which are disclosed in this Annual Report. We believe ourmanagement’s assumptions are reasonable; nonetheless, it is likely that at least some of theseassumptions will not come true. Accordingly, our actual results will probably differ from theoutcomes contained in any forward-looking statement, and those differences could be material.Factors that could cause or contribute to these differences include, among others, those risks anduncertainties discussed under the sections contained in this Annual Report entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and in “Quantitative andQualitative Disclosure About Interest Rates and Currency Rates,” and “Risk Factors” discussed inItem 1(A); our Proxy Statement for our 2006 Annual Meeting of Shareholders; and our other filingswith the Securities and Exchange Commission. Should one or more of the risks discussed, or anyother risks, materialize, or should one or more of our underlying assumptions prove incorrect, ouractual results may vary materially from those anticipated, estimated, expected or projected.
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**ELECTRORENT 2006 ANNUAL REPORT**Consolidated **Statements of Operations**              Year Ended May 31,          (in thousands, except per share information) 2006   2005  2004                   Revenues:             Rentals and leases $90,548   $80,257  $70,268 Sales of equipment and other revenues  24,258    27,359   23,842     Total revenues  114,806    107,616   94,110                   Operating expenses:             Depreciation of rental and lease equipment  35,776    33,365   30,559 Costs of revenues other than depreciation of rentaland lease equipment  13,574    12,497   14,219 Selling, general and administrative expenses  33,755    29,869   32,207     Total operating expenses  83,105    75,731   76,985     Operating profit  31,701    31,885   17,125 Interest income, net  2,705    1,476   1,335 Income from settlement  —    1,758   — Income before income taxes  34,406    35,119   18,460 Income tax provision  12,222    10,854   6,476     Net income $22,184   $24,265  $11,984     Earnings per share:             Basic $0.87   $0.97  $0.48 Diluted $0.86   $0.96  $0.48 Shares used in per share calculation:             Basic  25,359    24,978   24,860 Diluted  25,762    25,369   25,034     The accompanying notes are an integral part of these consolidated financial statements.
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**ELECTRORENT 2006 ANNUAL REPORT**Consolidated **Balance Sheets**          As of May 31,       (in thousands, except share information) 2006   2005     Assets         Cash and cash equivalents $58,748   $31,997 Marketable securities  22,750    48,800 Accounts receivable, net of allowance for doubtful accounts of $681 and $839  14,001    10,548 Rental and lease equipment, net of accumulated depreciation of $122,213and $133,170  140,108    122,798 Other property, net of accumulated depreciation and amortization of $12,773and $12,131  15,528    15,722 Goodwill  2,083    — Intangibles, net of amortization of $294 and $62  2,127    62 Other  4,337    3,295       $259,682   $233,222               Liabilities and Shareholders’ Equity         Liabilities:         Accounts payable $11,344   $13,983 Accrued expenses  8,595    8,700 Deferred revenue  3,303    2,768 Deferred tax liability  14,599    12,754     Total liabilities  37,841    38,205     Commitments and contingencies (Note 11)         Shareholders’ equity:         Preferred stock, $1 par — shares authorized 1,000,000; none issued         Common stock, no par — shares authorized 40,000,000; issued andoutstanding 2006 — 25,546,719; 2005 — 25,100,132  26,351    21,638 Retained earnings  195,490    173,379     Total shareholders’ equity  221,841    195,017       $259,682   $233,222     The accompanying notes are an integral part of these consolidated financial statements.
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**ELECTRORENT 2006 ANNUAL REPORT**Consolidated **Statements of Shareholders’ Equity**               Common Stock  Three years ended May 31, 2006 Number     Retained(in thousands) of Shares Amount Earnings              Balance, June 1, 2003  24,821  $16,023  $237,991 Exercise of stock options, net  185   1,978   — Tax benefit for stock options exercised  —   1,599   — Repurchase of common stock  (108)  (98)  (1,346)Special distribution  —   —   (99,515)Net income for the year ended May 31, 2004  —   —   11,984               Balance, May 31, 2004  24,898   19,502   149,114 Exercise of stock options  203   1,668   — Tax benefit for stock options exercised  —   468   — Net income for the year ended May 31, 2005  —   —   24,265               Balance, May 31, 2005  25,101   21,638   173,379 Exercise of stock options  453   3,816   — Tax benefit for stock options exercised  —   907   — Repurchase of common stock  (7)  (10)  (73)Net income for the year ended May 31, 2006  —   —   22,184               Balance, May 31, 2006  25,547  $26,351  $195,490  The accompanying notes are an integral part of these consolidated financial statements.
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**ELECTRORENT 2006 ANNUAL REPORT**Consolidated **Statements of Cash Flows**              Year Ended May 31,          (in thousands) 2006   2005  2004     Cash flows from operating activities:             Net income $22,184   $24,265  $11,984 Adjustments to reconcile net income to net cash providedby operating activities:             Depreciation and amortization  36,956    34,232   31,483 Gain on sale of rental and lease equipment  (9,526)   (11,018)  (9,379)Deferred tax liability  947    4,760   4,815 Income from settlement  —    (1,758)  — Provision (recapture) for losses on accounts receivable  46    (141)  645 Tax benefit for stock options exercised  907    468   1,599 Changes in operating assets and liabilities:             Accounts receivable  (2,038)   (2,312)  (1,866)Other assets  (986)   318   1,350 Accounts payable  25    (191)  1,768 Accrued expenses  (1,307)   (542)  (742)Deferred revenue  535    571   364     Net cash provided by operating activities  47,743    48,652   42,021                   Cash flows from investing activities:             Proceeds from sale of rental and lease equipment  20,512    20,944   21,093 Cash paid for acquisition, net of cash acquired  (9,404)   —   — Payments for purchase of rental and lease equipment  (61,352)   (72,129)  (42,815)Net sales (purchases) of marketable securities  26,050    3,675   (42,475)Payments for purchase of other property  (531)   (505)  (599)    Net cash used in investing activities  (24,725)   (48,015)  (64,796)                  Cash flows from financing activities:             Special distribution  —    —   (99,515)Proceeds from issuance of common stock  3,816    1,668   534 Payment for repurchase of common stock  (83)   —   —     Net cash provided by (used in) financing activities  3,733    1,668   (98,981)    Net increase (decrease) in cash and cash equivalents  26,751    2,305   (121,756)Cash and cash equivalents at beginning of year  31,997    29,692   151,448     Cash and cash equivalents at end of year $58,748   $31,997  $29,692     The accompanying notes are an integral part of these consolidated financial statements.
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**ELECTRORENT 2006 ANNUAL REPORT**Notes to**Consolidated Financial Statements**For the years ended May 31, 2006, 2005 and 2004